BOK Financial Faced With Self-Dealing Suit

Plaintiffs say the choice of underlying investments in funds using BOK’s CIT structure, as well as the use of BOK’s proprietary money market fund, were to benefit the firm.

Participants in BOK Financial’s 401(k) plan have filed a lawsuit alleging the company, its retirement plan committee and Cavanal Hill Investment Management Inc., a subsidiary of BOK, have failed to administer the plan in the interest of participants and failed to employ a prudent process for managing the plan.

Instead, they allege, the defendants manage the plan for the benefit of BOK at the expense of plan participants.

In a statement, BOK Financial said: “As a top-30 U.S. financial institution, BOK Financial holds itself to the highest standards of process, oversight and governance in all matters. We are particularly confident and proud of our employee benefit plan, as are our employees.”

According to the complaint, BOK and Cavanal Hill are employed by the plan to manage key investment options for plan participants including the target-date funds (TDFs) and the capital preservation option, among others. These investment options are BOK’s proprietary funds and are not products that a disinterested fiduciary would choose, the complaint says, noting that: “No other ERISA [Employee Retirement Income Security Act]-governed defined contribution plan similar in size to the plan offers BOK’s proprietary funds.”

The plaintiffs claim that BOK’s proprietary funds are excessively priced for the large plan market, and the performance of those funds does not make up for the higher price that participants must pay. They also allege these “defects” applied to BOK’s proprietary international equity fund retained as an option in the plan. They say, “Defendants appear to have retained it for the sole purpose of collecting fees for BOK and Cavanal Hill from the plan.”

The complaint states, “Defendants’ self-interested and imprudent conduct has cost the plan millions of dollars in excessive fees and lost investment returns during the class period. Based on this conduct and the other conduct alleged herein, plaintiffs assert a claim against defendants for breach of their fiduciary duties of loyalty and prudence (Count One) and against BOK for failing to properly monitor the committee and its members (Count Two).”

The lawsuit argues that there is an additional layer of fiduciary responsibility for collective investment trusts (CITs) compared to mutual funds. Not only are the plan fiduciaries who set the investment menu obligated to act prudently and loyally in retaining a CIT option, the CIT operator and adviser also are obligated to satisfy fiduciary standards in retaining the underlying investments of the CIT. The TDFs in the plan were held within a CIT structure rather than a mutual fund structure. “This creates a separate and independent set of fiduciary duties with respect to these investments,” the complaint says.

The lawsuit also claims that because stable value funds offer the benefits of money market funds with higher yield potential, experts have long touted the superiority of stable value funds for capital preservation in defined contribution (DC) plans. “The choice became even more stark after the 2008 financial crisis, as money market fund yields retracted to close to zero and remained there until 2016, often failing to keep pace with inflation. During the same period, stable value funds consistently generated meaningful returns with no loss of principal,” it says.

Specifically, the complaint alleges the retirement plan committee imprudently and disloyally retained the BOK TDFs in spite of superior non-proprietary alternatives. In addition, it says BOK and Cavanal Hill failed in their separate fiduciary duty to prudently and loyally monitor the underlying investments of BOK’s TDFs. The plaintiffs allege the fee excesses and underperformance of BOK’s TDFs are attributable, in part, to these failures.

The lawsuit says BOK and Cavanal Hill also mismanaged the BOK TDFs by exclusively using mutual funds as underlying investment holdings and failing to consider lower-cost collective trust versions of the same investments. “For a fund-of-funds CIT product like BOK’s target-date funds, choosing higher-cost mutual funds as underlying investments defeats the purpose of using a CIT structure in the first instance,” the complaint states.

The plaintiffs further allege that BOK and Cavanal Hill not only failed to consider alternatives to mutual funds, they also failed to obtain the lowest-cost shares of mutual funds held within the BOK TDFs.

They also claim the retirement plan committee failed to investigate alternatives to the plan’s money market fund, such as a stable value fund or other mutual funds from unaffiliated fund companies. And they allege that the committee’s inaction was not due to any deficiency in the marketplace of available stable value options, but that requiring all capital preservation assets in the plan to be held in BOK’s proprietary fund drives more fees to BOK, and BOK does not offer a proprietary stable value fund.

The plaintiffs say the committee’s “conflicted judgment” also caused the plan to retain an inappropriate international equity option. The BOK International Strategic Allocation (ISA) Fund is another fund managed by BOK and Cavanal Hill through BOK’s MAP CIT product. Like the BOK TDFs, the ISA Fund is made up of more than a dozen underlying mutual funds. Together, the ISA Fund’s underlying funds cover international stock markets broadly. Participants pay a fee for BOK’s and Cavanal Hill’s management service, and they also bear the cost of the underlying funds.

As many lawsuits of late contend, the complaint says the plaintiffs did not have actual knowledge of all material facts necessary to understand that the defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before the lawsuit was filed. Further, it says, the plaintiffs do not have actual knowledge of the specifics of the defendants’ decision-making process with respect to the plan or the plan’s investments because this information is solely within the possession of the defendants prior to discovery.